Definition
Effective Tax Rate (Corporate)
The effective tax rate is the actual tax a company pays as a percentage of its pre-tax profit, which can differ from the statutory rate due to exemptions and timing differences.
While India's statutory corporate tax rates are fixed, a company's effective rate varies because of tax incentives, exempt income, disallowed expenses, and the interplay of deferred tax assets and liabilities. The notes to accounts include a reconciliation explaining the gap.
A persistently low effective tax rate may reflect genuine incentives or aggressive tax positions that could reverse. Analysts normalise for tax-rate changes, such as the 2019 cut for new manufacturing companies, when comparing post-tax profits across periods or peers.
Related terms
- Profit After Tax (PAT)Profit After Tax is a company's net profit remaining after all expenses, interest and taxes have been deducted, the bottom line of the income statement.
- Deferred Tax Asset (DTA)A Deferred Tax Asset is a balance-sheet item representing taxes a company has effectively prepaid or can recover in future, often from carried-forward losses.
- Deferred Tax Liability (DTL)A Deferred Tax Liability is a balance-sheet item representing taxes a company will owe in future due to timing differences between accounting and tax treatment.
- Notes to AccountsNotes to accounts are the detailed disclosures accompanying financial statements that explain accounting policies, breakdowns and items not visible on the face of the statements.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.